Oversimplification of capitalism has role in crisis

The worst crisis in the American and world economy since the Great Depression is based as much on societal self-deception as it is on home-mortgage loans, interest rates, banks, greed and consumer materialism.

The societal self-deception starts with some basic misuses of the English language.

The use of the phrase “free-market capitalism” has done great harm. So has “free-market economy.”

Politicians, the media, the business community and citizens themselves, at least since the end of the Cold War, have convinced themselves that we live in a free-market capitalist society and that we are each free to pursue the American dream as we see fit — and that we are especially free to take whatever creative measures are before us to have the home of our dreams.

This focus on freedom, and the implicit assumption that free-market capitalist societies rather than societies with mixed economies defeated Soviet communism in the Cold War, has given everyone a confidence in our way of life and our political and economic system which rests on a cardinal mistake.

The mistake is the notion we live in a free-market capitalist society. We don’t.

We lived in a free-market capitalist society in 1929, though even then that society had a set of regulatory and redistributive mechanisms that had departed from a pure laissez-faire system, including policies that came from the Food and Drug Act of 1906, the Federal Trade Commission Act of 1914 and the Federal Reserve Act of 1913.

Certainly today, we live in a society that has a mixed economy, one that blends core ideas of free-market capitalism and core ideas of democratic socialism, a society that has massive mechanisms of regulation and redistribution that serve to counteract the contingencies of birth, socio-economic class and nature in order to ensure that all Americans are treated with dignity and justice.

Since the New Deal we have more or less adopted the main ideas of the great British economist John Maynard Keynes, ideas which center around one core notion: In order for a democratic society to sustain itself the government must intervene in the private sector to maintain full employment and strong economic growth.

FDR of course was the politician who led this effort, but many of his policies had a Keynesian theoretical underpinning.

Admittedly we have swerved back in the direction of the laissez-faire model, namely during the Reagan years. But even then we were still working in a broadly Keynesian framework.

Many of our best education, environmental, and healthcare programs are broadly Keynesian programs. You basically cannot use public dollars to build schools, hospitals and roads without being a Keynesian in some sense of the term. In a pure capitalist, free-market society there is literally no mechanism to spend public dollars on education, healthcare, and transportation.

If we had only accepted the fact that much that is of value in our national economic system comes from this core Keynesian insight — including the Securities and Exchange Commission, the National Labor Relations Act, the Consumer Product Safety Commission, Social Security, Medicare, Medicaid, and a series of Clean Air Acts — we would not have let central elements of the financial system escape the kinds of regulations that a good Keynesian knew that we needed.

If we had not distorted the reality of our mixed-economic system, then fewer citizens would have become sucked into homeownership schemes that deceived them into thinking that their economic freedom was being promoted and protected by business people who in reality were using these citizens for their own private gain.

The congressional bailout plan is essentially a Keynesian plan because it requires that the federal government invest money in the private sector in order to sustain the economic infrastructure of the United States. Economists can argue details over whether the economic assumptions and curves are exactly those Keynes called for. And they can argue about whether an investment strategy that is focused more on monetary policy than deficit fiscal spending is really a Keynesian strategy.

But the bottom line is that government investment is at the core of the federal solution to this national and international mess, and that move we owe to Keynes more than any economist in the last 100 years.

The bold Keynesianism of the Bush administration and Democratic Congress is also a clear reminder that we have a capitalist mixed-economy and not a capitalist laissez-faire economy.

President Bush did not emphasize this fact when the leaders of the other economic powers of the world (almost all of whom have capitalist mixed-economies) were here for the Bretton Woods II conference, but we can at least hope that President-elect Obama, who has a profound appreciation of the use of language in politics, ushers in his administration with some straight talk about what kind of economy we have and what our options for change are.

Anderson, Ph.D., taught “Ethics and Politics” at George Washington University’s Graduate School of Political Management for 12 years.